Why Gold Is So Important To Investors

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Gold has been an important adornment and investment and as a display of wealth and power across the centuries.

The precious metal has an inexplicable allure for the rich, who want to be richer and display their wealth, and for the poor, who just want to be wealthier.

In an effort to explain the importance of gold to investors, trade body the World Gold Council has published a report outlining some of the modern meaning of holding gold for buyers.

The council suggests that investors should hold gold in the range of 2% to 10% of their portfolio, saying that around 5% is optimal for investors with a well-balanced 60:40 portfolio.

The question is who are these investors that hold gold?

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Central bank strategy

Central banks are among the largest investors and have been net buyers rather than sellers for the past four years or so. Trading gold as part of shielding long-term holdings from short-term volatility is seen as an important investment strategy for central banks.

But other investors have taken a shine to gold as well.

Many simply buy gold over the counter from dealers as bars, coins and jewellery. Retail investment soared by 36% in the first three quarters of 2013, compared to a year earlier.

Despite the boom in buying retail gold, metal bought this way makes up an average of less than 1% of an investment portfolio.

One big attraction for buying gold is, historically, the price is not correlated to any other asset and has an independent value across borders. This liquidity is very attractive for someone who needs to raise money quickly.

Gold holds value

The precious metal is a hedge against risk and fluctuation in foreign currency exchange rates.

Gold is also more accessible to investors who are less likely to hold the physical product than investments with the backing of the precious metal.

For instance funds and shares in mining companies let investors benefit from the demand for gold without directly investing in the metal as a commodity.

“Our analysis shows investors use gold to protect their global purchasing power, cut the risk of portfolio volatility and to keep losses down during market shock. Gold is a high-quality, liquid asset that still holds value when selling other assets would cause losses,” said a World Gold Council spokesman.

Read more about investing in gold from the World Gold Council

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